Key Takeaways
Before buying a car, the first question that goes through your mind is, 'how much can I afford for a car?' So, it's good to calculate the amount of money you have to spend on the car expense before making the purchase. Based on a study, it is recommended that your monthly payments should be around 10% to 15% of your take-home pay and not more than that. So, when it comes to the total monthly car expenses, it should not be more than 20% of your monthly income.
You need to consider various factors before making your car purchase.
It is advisable to spend about 10% to 15% of your take-home monthly pay and not more than that for the monthly car payments. Choose a longer loan term if you wish to lower the monthly payments. But by doing so, you will have to pay more interest for longer.
The monthly payments will be low if you make a larger down payment. However, making a 20% down payment is preferable as the new cars depreciate quickly.
If you prefer a shorter loan term, the monthly payments will be high, but the money paid in interest over time will be low. On the other hand, monthly payments will be low for a longer loan term, but you have to pay more interest over time.
A car trade-in can reduce your borrowing needs or allow you to upgrade your current vehicle. To illustrate, say you want to buy a $20,000 car and plan to trade in a vehicle worth $5,000. Assuming a trade-in value of $5,000, this would reduce your net cost for the vehicle to $15,000.
If you haven't paid off your trade-in yet, but just a modest amount is still owed on your loan, the dealer may offer to buy out the rest of your loan using some of the value of your trade-in. Using the same illustration, if $1,000 were still owed on loan, that amount would be deducted from the trade-in price. Your discount would then be reduced to $4,000, bringing the total amount you'd have to pay to $16,000.
By having a high credit score, the interest rates will be low. However, the interest rate does not solely depend on the credit score but also the type of car. Therefore, the interest rates for used cars will be much higher than that for new cars.
Use our car affordability calculator to calculate your monthly loan payments and the amount you can afford in total. As mentioned before, if you make a down payment or you trade in your car, you can buy more expensive cars as per your wish with lower monthly payments.
Make changes to the down payment, trade-in value, loan duration, and interest rate to determine how these variables affect your monthly payment and overall car budget.
Use our car loan calculator to see how a trade-in, down payment, or loan term can impact your monthly payment.
After estimating the loan amount, you can afford, you will get an idea of the target purchase price. Due to the current state of the market, many popular models will have a "market adjustment" added to their prices in the form of additional profit.
When you estimate the total car price, do not forget to find the extra costs like sales tax and fees like registration fees and documentation fees.
Use the auto loan calculator to find the initial money you need to spend to make your purchase.
You should find out whether you can afford the car's maintenance costs in addition to the monthly payment. Compare insurance quotes and utilize a cost-to-own tool to get a sense of what you might be looking at financially.
Cost-to-own calculators help to factor in things like anticipated gas expenses, maintenance and repair costs, state levies, and typical vehicle depreciation.
One way to determine how much you can afford is to use your present salary as the basis for your car payment, but a more reliable indicator is your take-home pay.
Using the table below, you may generate a ballpark figure for your monthly auto payment if you only know your annual earnings.
| Annual salary | Maximum monthly car payment |
|---|---|
| $25,000 | $208 per month |
| $50,000 | $416 per month |
| $75,000 | $625 per month |
| $100,000 | $833 per month |
| $125,000 | $1042 per month |
| $150,000 | $1250 per month |
Some people looking to buy a car will be perfectly happy if they just go with common wisdom and do nothing else. However, a more customized monthly budget can be extremely useful in some circumstances.
By taking this step, you'll have a clearer image of your financial situation and a better grasp of how much you can afford for a car. It's helpful if your monthly living costs are much higher or lower than the average person's.
Net income indicates the take-home salary, which implies the income you receive after reducing the state, federal and local income taxes.
Rent/mortgage, credit card bills, food, utilities, entertainment, and clothing are all examples of current nonauto expenses.
Increasingly, people are using debit and credit cards to pay their monthly payments. If you are one of these people, you can utilize your bank or credit card statement to receive a picture of your monthly expenditures.
A major life event like marriage, starting a family, divorce, or buying a home may prompt a person to make a large purchase, such as a car.
When planning for a major purchase like a new car in anticipation of one of these life events, it's important to include the additional costs associated with your expected or actual circumstances.
If you plan to take out an auto loan, calculate how many payments you will have to make monthly. To calculate whether you can afford that monthly payment, calculate your actual loan amount considering the down payment you plan to make and the trade-in value.
Other expenses include the following:
Fuel
Monthly fuel costs can be calculated by multiplying the cost per mile by the number of miles you anticipate to cover each month.
Car insurance
Based on how expensive your car is, the insurance rate varies. Insurance costs depend on the vehicle type, driving record, age, and other factors.
Maintenance and repair
A study found that a driver spends an average of $0.09 per mile for the routine maintenance and repair of a new car. But, of course, if it is a used car, it costs more. Routine car maintenance includes brake pad replacement, oil changes, windshield wiper replacements, tire rotation, new batteries, and more.
Registration
Registration fees vary from state to state. It might be either a fixed amount or vary based on the vehicle's age, weight, and present value.
Driver's license fees
You need to pay this mandatory fee to renew your driver's license every few years. Unfortunately, its value is not the same in all states.
Parking
Parking fee is another expense from your side if you park at work or somewhere else.
To calculate the amount of discretionary funds you have with you, subtract your current and projected expenses from your total net income. You can use these funds as savings or for other enjoyment, like a long trip to your favorite spot.
A car loan calculator would often ask for the entire loan amount you can afford and then recommend a monthly payment based on that amount. However, not every situation is suitable for this method. Therefore, it makes more sense to ask how much of a monthly payment you can afford.
With the help of our car affordability calculator, you can figure out how much of a loan you can afford based on the monthly payment you can afford and the number of years over which you can make those payments. In addition, you'll be able to estimate how much of a loan you'll be able to afford based on the annual percentage rate (APR), down payment, and trade-in value (if applicable).
You can try different options when you are planning to buy a car. There will be situations when you want to own a new car, but due to the lack of sufficient funds, you find it difficult to get what you want. Go through the different options given below.
Leasing
If you want to have the feel of a new car but can't afford the monthly payments, then leasing will be the right thing you can do. However, leasing a new car for a long period is not a good choice. Leasing a new car works for you in the following two cases.
Buying used car
Buying a used car is a cost-effective option if you are not particular about the make or model you drive. The lower purchase price of a used car means fewer monthly payments compared to a brand-new vehicle. They're also cheaper to maintain and operate overall due to a lower rate of value decline and lower insurance premiums.
Buying new car
That brand-new car smell is irresistible at times. Do your homework and shop around to find the best value if a brand-new car is a must-have. To get the best price on the car you want, you need to know its fair market values before going car shopping. If you're on a tight budget, it may be wise to opt for a stripped-down version rather than a more expensive one.
When you have saved for your car, you will probably wish to pay full cash to buy the car. But before making that decision, let us analyze whether it is the right decision or not. For example, suppose you wish to invest your savings and prefer to make reasonable monthly payments for a particular period for a comparatively lower interest rate. In that case, financing your car will be the right option.
If you can finance your car at a good interest rate, it is always worth investing your savings elsewhere, like in stock markets or mutual funds. By doing so, you get a better return on your money.
For instance, if the APR on your auto loan is 6% and the return rate on your mutual fund investment is 12% per year, you would earn a net 6% return on your money as you paid off the loan (you may be subject to taxes on your investment gains from the mutual fund). You can still make a return on your investments in this basic example rather than spending it all on a new car. Getting an auto loan is a great choice if you can get one with a low-interest rate and a short repayment period (24 to 48 months).
If you've decided that financing a car is the best course of action, here are some general guidelines to follow while shopping for a car loan.
A down payment will always be the best choice for financing a car. Therefore, making a 20% down payment when you choose a loan is advisable.
If you want to reduce the interest you pay and need to finish your payments soon, choose a loan term that will not exceed 48 months. By doing so, you can free yourself from paying lenders' higher insurance requirements. On the other hand, if you choose a longer loan term, like four years or so, after four years, if the car's value drops and you're still making payments, you're putting yourself at greater financial risk.
To avoid risking yourself financially, keeping your monthly payments below 10% is always good.
If you are planning to buy a car, here are some tips.
It is best to compare at least five quotes from different insurance companies because each company has a unique perspective on what constitutes a safe driver and vehicle combination. To avoid spending too much on auto coverage, shopping around and comparing quotes from several providers is essential.
Any used car that has been through a pre-purchase inspection and has been deemed to be in good working order might be considered to be of similar quality to a new vehicle. As a result, used automobiles can save you a ton of money.
When negotiating the final price, many dealerships may try to tack on various "recommended extras" to the bill of sale. Read the documents before you sign to avoid unwanted financial losses.
Car dealerships have used deceptive practices to entice customers in the door for decades, such as inserting hidden expenses, undervaluing your trade-in, and plain lying.
You can still get a great price by haggling with dealerships, but you should be prepared before approaching them.
When you buy a car, ask yourself whether it serves you what you need. Then, collect as much information about the vehicle you want to purchase before finalizing your decision.
Planning will help you enjoy more of your hard-earned money once you've brought your new car inside. Be sure to factor in more than the monthly payment while evaluating vehicles. Find an automobile whose monthly payments won't exceed 20% of your net income.
Find an automobile that satisfies your needs and leaves you with some breathing room in case of sudden expenses or a shift in your income.
If you plan to finance your car, then be keen that your monthly payments should be around 10% to 15% of your take-home salary. Through this practice, you will be able to avoid unwanted financial burdens.
There are many auto loan companies from where you can finance your car. Some of the best companies are myAutoloan, PenFed Credit Union, LightStream, Bank of America, Consumers Credit Union, and so on.
It is completely your choice. You can finance a car with a larger monthly payment if you want to spend more on a car and less on other needs. If you want to spend less, choose a more affordable loan amount where the monthly payments are not that high. Maximum monthly payment if your annual salary is $100000 will be approximately $833 per month.
Use the loan calculator and set how much monthly payment is affordable for you and based on that, find the loan amount. Once you know the loan amount you can afford, search for cars that come in that price range. Maximum monthly payment if your annual salary is $50000 will be approximately $416 per month.
If your annual salary is $60k, then the maximum monthly payments that you can afford will be $21000. The loan calculator will help you determine the monthly payment amount that you can afford.